The Wall Street Dilemma

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Clay Christensen has spent years studying how companies innovate and compete. His 1997 book The Innovator’s Dilemma inspired a generation of business leaders, including Apple’s Steve Jobs and Amazon’s Jeff Bezos.

In this month’s issue, the Harvard Business School professor takes on another big subject: Why is it that so many companies have so much capital on hand but are investing so little in innovation? We’re sitting on massive amounts of cash, choosing to grow businesses incrementally rather than ambitiously, he laments. Capitalism, he concludes, isn’t working.

To Christensen, the problem arises in part from the metrics companies and financial markets use to assess investments—measurements based on the flawed assumption that capital is a scarce resource, to be conserved at all costs. In fact, capital is no longer companies’ scarcest resource, he contends, and we need to adapt our methods for evaluating potential investments accordingly.

Christensen’s article is part of this month’s Spotlight package, Are Investors Bad for Business? Elsewhere in the Spotlight, HBS professor Gautam Mukunda argues that the financial sector has become disproportionately powerful, exerting excessive influence on corporate performance and intensifying the focus on short-term results. Mukunda offers several ideas for fixing the problem.

We wanted to add the perspective of someone who has been in the trenches. Sam Palmisano, the former CEO of IBM, spoke with HBR’s Justin Fox about how he countered the pressure for short-term results. He explains why he devised “the model”—a rolling multiyear road map for earnings growth and cash generation that stood in place of quarterly guidance as a performance signal for investors. As Palmisano puts it, “The orientation around a 90-day outlook was distorting to management practice.”

More and more CEOs share these concerns, but systemic change has been slow. We hope the ideas in the Spotlight contribute to the effort for smart reforms. Adi Ignatius, Editor in Chief

A version of this article appeared in the June 2014 issue of Harvard Business Review.